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Apple's strategic challenges as it decouples from China.

Apple and China have been tightly tied for almost 20 years. The majority of Apple's gadget production and a sizeable chunk of its sales are concentrated in the nation with the largest population in the world.

29th July 2022 Author: SAMAR TYAGI
Apple's strategic challenges as it decouples from China.


Apple and China have been tightly tied for almost 20 years. The majority of Apple's gadget production and a sizeable chunk of its sales are concentrated in the nation with the largest population in the world.

But this year, a few rifts in what was once a win-win partnership began to show. China's "zero-Covid" approach is mostly to blame for the unrest; early this year, severe lockdowns in many regions of the country stopped production at many facilities, including those of Apple's manufacturing partners Foxconn and Pegatron, and upset global supply lines.

During Apple's most recent earnings call in April, CEO Tim Cook warned that China's supply chain bottlenecks might cost the company's business up to $8 billion in the coming quarter. The company is scheduled to release its quarterly earnings on Thursday after the bell. China has mainly adhered to its strict pandemic restrictions so that suffering might continue.

Apple's reliance on China has already caused problems for the business. Apple warned about sluggish iPhone sales a year before the outbreak as the US-China trade battle heated up. Over the years, Apple has also come under fire for the workplace conditions at some of its suppliers' factories.

Apple might be hedging some of its bets, though. The corporation is reportedly trying to increase production in nations like Vietnam and India, citing China's tight COVID policy as one of the reasons, according to an article in The Wall Street Journal published earlier this year.

Apple did not respond to requests for comment for this article, although at the most recent earnings conference, Cook highlighted Apple's more comprehensive manufacturing presence. The products are produced worldwide because of "our genuinely global supply network," he claimed. "We keep considering optimization. Every day, we gain knowledge and change. "

However, China has invested years in creating a set of supply chain ecosystems, local engineering expertise, and production incentives that will be hard to duplicate abroad. In a 2015 interview, Cook stated, "All of the tools and die makers in the United States could probably fit into the space where we are now." You would need many football fields in China. "

There has been "growing pressure to diversify product assembly outside of China, but doing so won't be easy given that the proximity to component suppliers is a fundamental rationale for staying in China," according to Bryan Ma, VP of device research at market intelligence firm IDC.

 

A big market

The fact that Apple's biggest market outside of the US is China further complicates matters.

According to Amber Liu, a Shanghai-based smartphone analyst at tech research firm Canalys, Apple presently holds 18% of the Chinese smartphone market and accounts for about a quarter of Apple's global sales.

In other words, according to Gad Allon, director of the University of Pennsylvania's management and technology department and an expert on supply chains, China is "where a major portion of the growth market lies." He claimed that Apple has "many, many reasons" to remain quiet rather than risk upsetting the Chinese government.

This week, Apple gave its Chinese customers discounts on its newest iPhone models worth up to 600 yuan ($89), which may be a sign that it is concerned about demand in the nation. Apple rarely runs these types of promotions.

 

Ongoing dangers

Because of US House Speaker Nancy Pelosi's potential visit to Taiwan, the self-governing democratic island China has long claimed as part of its territory, tensions between Beijing and Washington have dramatically increased recently. As one of the world's foremost centres for the semiconductor chips used in most electronic products, Taiwan is also the home base for numerous important Apple suppliers, including Foxconn, Pegatron, and Wistron.

While the COVID lockdowns will compel some companies to diversify their manufacturing locations," On the other hand, "a much more critical marker in determining China's destiny as a manufacturing hub" would be a significant escalation in Taiwan.

He added that any disruption to Taiwan's supply chains brought on by a military conflict would significantly affect Apple's operations.

 

Apple appears to be stuck in its ways for the time being.

China has been getting more expensive for a while, but in the past year, it has also become more volatile. Despite that, it is now unable to locate organizations with the necessary expertise and volume to meet Apple's demands.


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